U.S. Probes Cable for Limits on Net Video

The Justice Department is conducting a wide-ranging antitrust probe into whether cable companies are acting improperly to quash nascent competition from online video. Thomas Catan has details on The News Hub. Photo: AP.

By

Thomas Catan And

Amy Schatz

Updated June 13, 2012 12:08 p.m. ET

WASHINGTON—The Justice Department is conducting a wide-ranging antitrust investigation into whether cable companies are acting improperly to quash nascent competition from online video, according to people familiar with the matter.

Justice Department officials have spoken to several online video providers, including Netflix Inc.NFLX2.47% and Hulu LLC, those people said. Investigators have also questioned Comcast Corp.CMCSA0.08%, Time Warner Cable Inc.TWC-0.43% and other cable companies about issues such as setting data caps, limits to the amount of data a subscriber can download each month, these people said.

Representatives of all those companies and the Justice Department declined to comment on the investigation.

ENLARGE

Cable companies provide both television channels and high-speed Internet access for many consumers in the U.S. With broadband Internet, consumers can watch individual programs or channels through online video services like Netflix, Hulu or Amazon, bypassing the cable company's traditional bundles of channels.

Having invested billions of dollars building their networks, some pay-TV companies have shown little inclination to get out of the business of packaging television channels and become mere conduits for other companies' data. Some major entertainment companies also have an interest in preserving the current model of television viewing because they want cable companies to take bundles of their channels, rather than just cherry-picking the most popular ones.

The Justice Department probe highlights how the shifts in decades-old patterns of television viewing are shaking the tightly regulated industry. Decisions in Washington could play a role in determining how quickly the new video services spread and what form they take.

Already the Justice Department's Antitrust Division has jolted another fast-growing Internet industry, e-book publishing, by bringing a lawsuit alleging that publishers and Apple Inc.AAPL-0.87% colluded to fix prices. In April, several publishers settled the charges while Apple and other publishers continue to fight the suit.

In its cable TV probe, Justice Department investigators are taking a particularly close look at the data caps that pay-TV providers like Comcast and AT&T Inc.T-0.17% have used to deal with surging video traffic on the Internet. The companies say the limits are needed to stop heavy users from overwhelming their networks.

Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers. They also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.

Comcast fanned those fears in March, when it said that videos viewed on its own Xfinity app on Microsoft'sMSFT-0.38% Xbox wouldn't be counted against subscribers' data caps in the same way as videos viewed using Netflix, Hulu or other apps. Netflix Chief Executive Reed Hastings accused Comcast of trying to get around federal rules that prevent Internet providers from favoring their own content over others on the Internet. Hulu's owners include Comcast and News Corp., which owns The Wall Street Journal.

According to the people familiar with the matter, the Justice Department is examining whether Comcast's Xbox policy violated legal commitments made by the company in 2011 to secure antitrust approval for its takeover of NBCUniversal. Under the terms of that legal settlement, Comcast agreed it would not "unreasonably discriminate" against other companies transmitting data over its pipes, or treat its own content differently.

Comcast has said it is complying with the terms of the settlement and isn't discriminating against other companies' content. Xfinity, it says, is unlike Internet video services like Netflix because it travels over Comcast's own private network and not the public Internet.

"We have consistently treated all video carried over the public Internet the same whether it comes from our sites or anywhere else on the public Internet," the company said in May. Nevertheless, it announced then that it would suspend its data caps and start testing a new system that would allow heavy users to pay for more data.

Another issue that investigators have asked about is whether cable companies are acting anticompetitively by making viewers have a cable subscription before being able to access certain online programming. Comcast and some other companies have verification systems requiring viewers to enter their cable subscription details before being able to watch, say, ESPN's programming on an iPad tablet.

Cable companies say they want subscribers to be able to watch their programming on any devices, not just their TVs. Among the strongest backers of the verification system is content owner Time Warner Inc., which wants to keep consumers buying packages of cable channels. Some public-interest groups have alleged that such paywalls discourage people from dumping their cable subscriptions and buying channels like ESPN individually online.

The Justice Department also is investigating the contracts that programmers sign in order to be distributed on cable systems. Some contracts include so-called most-favored nation clauses, which make programmers give the biggest cable companies the best price they are offering anywhere, among other conditions. The Justice Department is questioning whether there are legitimate business reasons for such terms or whether they are intended to stop programmers from experimenting with other forms of online distribution, a person familiar with the matter said.

Most-favored-nation clauses are also an issue in the e-books case, where Apple sought to ensure that publishers gave the Apple online bookstore the best price available.

Attorney General Eric Holder on Tuesday suggested he had sympathy for those who want to "cut the cord" rather than paying for cable channels they don't watch. At a Senate hearing, Sen. Al Franken (D., Minn.) said cable bills are "out of control" and consumers want to watch TV and movies online. Mr. Holder responded, "I would be one of those consumers."

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